What next in our investment journey?

[Singo]

Hi all,

Sorry for a long post. We need some guidance from you.

In January 2012, we bought a 3x1 duplex half in Langford, WA. The house value has increased by 25% to 300K now. (The initial price itself was low as it was a mortgagee sale) We used that equity gain to buy a 3x1 R20/30 in Gosnells in March 2013. The price, buying costs and renovations added comes to around 280K and it will go for 330K-340K now.

Using this equity gained we are buying again in Langford, a 3x1 needing substantial renovation, settlement next month. We have actually paid 20K more that what we should have paid for the 3rd property as it is, but it will be neutrally geared at current interest rate. But the plan is to build a GF and the property will be positively geared even if interest rates go north.

Once the 3rd property is settled we will have 765K in loans and around 200K in equity. All our loans are 80% and we prefer not to pay LMI. The reason is we are low income earners and thus prefer not to take higher percentage loans. We pay interest only.

My take home income is 38,500. And my partner makes around the same amount. We live on one income and use the second income to invest. And partner's income may drop to 12,000 sometime soon.

We are into our 30s now. And want to have kids. So we have to go to one income anyway. Thus we prefer our investments to get in some cashflow.

We may be able to get 20% deposit for 4th property by subdividing the 2nd and using that equity. But the banks may not finance a 4th property at our income levels. Even if bank fund, it is risky at our income level. So it seems boosting cash flow by building GFs would be the good strategy to move forward.

Option 1: Now we are considering selling the 1st property as it is a duplex half and buy a house with enough land to build a GF. Subdivide 2nd house, use the equity to build 2 GFs and build a house in the subdivided land after some years. The risk is that after selling, we may not be able to buy another one and thus miss out possible CG. Selling and buying will cost a lot. And we will have to rent.

Option 2: Not selling first property. Subdivide 2nd property, build GF at 3rd and then after few years build a house behind 2nd.

What are other options? What other stuff we should consider?

Singo

 

[dilberto]

Misc thoughts:

It surprises me that you've seen 25% gains on your first place since 2012. How certain are you of this being an achievable sale value vs being a really positive guestimate (WA isn't looking to cheery at the moment..)

Your overall financial position at the moment is $77k pa combined with $200k equity & $765,000 of loans.. All in the WA real estate market. You're looking at dropping to one income of $38.5k pa.

Option 1:
- Sell IP 1, pay CGT + legals + agent fees
- Buy a house, pay legals + agent fees + stamp.
- Sub-div house, pay for plans + legal fees.
- Re-draw Equity from other investments to build 2x GF's (I honestly don't think you'll have enough $$ at this stage to build 2x GF's....) Construction fees
- Down the track build a house on the block (knocking down the GF's or are you buying a HUGE block - if so I don't think you can afford the mortgage on a huge block..)

Option 2:
- Keep IP 1
- Subdiv IP 2, plans + legals (why the eff would you do this now if you're not building on it anytime soon!! Its not a fun or cheap process)
- Build granny flat at IP 3, construction fees.

I'm going to skip straight over everything above, I've already dabbled in comments on them, I'm sure other posters will drill down into specific strategies..


1. Why are you focusing so hard on property and not on getting your income above $38.5k? You live in freakin' WA & you're both educated.

2. Do you REALLY think making massive investment decisions, constructing GF's, subdiv's, etc are a great idea when either having a baby or preparing to drop to a single income? You've already got a nice little setup, why not put it on hold for 18 months and develop the family side of your life.

3. Given your incomes, I'm going to be very surprised if you're going to be able to keep these places untenanted while simultaneously supporting the build cost of GF's. Tenants don't tend to like it when you turn their backyards into construction zones, nor do they like it when you want to move people into "their" backyard...

 

[Singo]

Thank you dilberto.

On first property, we made 10% gain when we bought. And the price is achievable.

We think that house plus land will be worth more than house on a subdividable land. So subdivision could create equity and that equity can be used to build GF behind 3rd property. You are right, we cannot go for 2nd GF straightaway. There is not enough land to build GF behind 2nd after subdivision. If we sell 1st and buy 4th, there will be land for a future GF once we save/gain additional equity.

The other points you mentioned are great as well.

1. I graduated in a field that made me an Aussie. But I did not enjoy it at all. I would rather study again than get a work in that field....
2. We would like to invest a bit more before dropping to one income and have kids. With kids, it would be impossible to get any loans from banks.
3. True. Must consider this when building. There will be fencing between main house and GF.

Thanks again

 

[thatbum]

I can confirm that Langford saw some ridiculous gains in the last 12 to 18 months and 25% growth sounds about right in that period for a well-purchased property. I bought a 3x1 in Langford on a 720sqm lot for $270k last year, reno $10k and now it looks I could sell for $350k.

Some thoughts from me - I'm also on a similar level of income and portfolio size, and I have been focusing 100% on what gets me cashflow in the short term.

My preference would be to build a GF without selling any existing cashflow positive/neutral property, and preferably without any subdivision required (the subdivision would take some time to complete I imagine). Is that possible?

If its not possible at this stage, it does seem that you are a good saver, and it may be that by the time you complete the designs and plans for a GF build, you will be able to finance it anyway.

 

[Singo]

Thank you thatbum

Yes, going for GF without selling is a good way to move on. And yes, we can save and use any equity gain to build a GF in say 18 months. This way we will move on slow and steady. The only issue which worry us is once we drop down to one income or say 1.25 income, we will find it difficult to buy anymore. At current level of income, 800K loans are possible. That is why selling duplex and buying a green title seems a good idea. If so at the end of current acquisition period we will have 3 houses and land for 2 GFs +land for a house. Currently we have 3 houses and land for one GF + land for a house.

 

[Singo]

Thank you

A lot have happened since I started this thread. Actually I updated this thread on 5th of March asking you all what to do next. But while analyzing our situation and portfolio to write that post, I sort of made up my mind what to do next and had deleted that post

When I started this thread, we had a PPOR, an IP and another IP settling. I was wondering whether to sell PPOR and buy again. We converted PPOR into an IP.

Since then we bought four and sold three. Two of the first three were sold and another was sold as well. With hindsight, we shouldn't have bought the one which had to be sold within few months. Actually we lost some money in the last two sales as they were quick sales. Second was sold to enable our latest purchase which will become our PPOR and third sold to create a buffer (loc).

We did some renovations as well. Nothing major. Painting, changing locks, doors, curtains etc and cleaning up. During February-April, helped 3 friends to buy as well. Two first homes and one IP. Altogether managed 10 transactions and 5 (small) renovations in last 10 months.

Now we have 3 IPs and a PPOR at better location. I reckon we are not going to buy/sell for a while. But I will try to be active here in the forum.

Thank you all for all the guidance and support.

 

[D.T.]

Awesome Singo, you da man

It inspires me that you can own multiple properties while earning half as much as most people i know.

 

[jingo]

A lot have happened since I started this thread.

Since then we bought four and sold three. Two of the first three were sold and another was sold as well. With hindsight, we shouldn't have bought the one which had to be sold within few months. Actually we lost some money in the last two sales as they were quick sales. Second was sold to enable our latest purchase which will become our PPOR and third sold to create a buffer (loc).


Now we have 3 IPs and a PPOR at better location. I reckon we are not going to buy/sell for a while. But I will try to be active here in the forum.

Thank you all for all the guidance and support.

Hi Singo, How much did all the buying and selling activity cost you? Has your overall equity position improved? I'm interested because whenever I consider selling one of my IP's the maths tells me it isn't worth it by the time capital gains tax and selling costs are taken into account. Your situation may be different though and you may now be out in front. Sounds good though, 3 IP's and a new PPOR.

 

[westminster]

Good to hear that all is going well.

 

[macca446]

Hi Singo,
Congrats on your situation it seems to have been the good choice for you and a good direction and on a modest wage you have done well,I have found myself in a similar situation as far as wages go until I get a regular paying job again as I have not worked for 2 years and only earning about 13k casual a year and my partner 45k,we have 940k IP debt and 240k ppor I am fortunate we are modest spenders and the income from the IPS returns us cash flow and pays our ppor mortgage I do not see myself getting a decent income until next year after my studies so I am sitting on the bench atm as far as investing goes.
Macca446

 

[WattleIdo]

I'm also in awe of your ability to save and to pull it all together. You've done so well and it sounds like you're the 'go-to man' for family and friends. Good one!

 

[Singo]

Thanks to DT, jingo, westminster, macca446 and Wattle for your kind replies.

Jingo, we paid the usual buying and selling costs except no sales commission for one of the sales. No cgt for first sale as it was ppor. Actually lost some money in the other two sales. But we made some instant equity in two purchases (buying well and small reno) So it sort of balanced. Our equity position has increased by 20k to 40k since initial post. If we did nothing and saved, we could have achieved the same result. But now we have a higher asset base, better properties, a loc buffer and most importantly some experience!

macca446, you are doing great. I think the best next step for me is also to study and get a better paying job.